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Shopping.com Until the Stock Drops

It's a competitive world for online shopping sites, and that's putting pressure on profits for Shopping.com.

Despite a 24% increase in sales, Amazon.com(NASDAQ:AMZN) still disappointed investors. After all, regardless of the growth, the company's profits are still erratic. Isn't e-commerce supposed to scale? That's the hope. But it is still a young industry and intensely competitive. To remain competitive requires constant investment.

Another e-commerce company reported this week: Shopping.com(NASDAQ:SHOP). And it disappointed investors, too. In the first quarter, revenues increased 38% to $28.9 million. During this time, net income increased from $2.2 million to $3.9 million.

Shopping.com, which went public last year, is an online comparison shopping service. Basically, the company generates revenues from merchants that list their products. In March, Shopping.com attracted roughly 24 million unique visitors, which was a 30% increase from the same period in 2004. By this metric, Shopping.com is the Web's most popular comparison shopping site.

A big part of the growth strategy is international expansion, and to that end, the company recently launched in France. This is certainly attractive to existing Shopping.com merchants, who now have more prospective consumers to sell to.

But just like Amazon.com, Shopping.com needs to continue spending on maintaining its website to keep customers interested. This means pressure on profitability.

Speaking of customers, Shopping.com does not have the brand name that Amazon.com does. Thus, Shopping.com needs to spend heavily on online advertising to get unique users to the site -- with a big amount from Google(NASDAQ:GOOG). And the costs are escalating. In the past quarter, online marketing costs increased by 68% (from $8 million to $13.4 million) and became a larger portion of the company's total sales and marketing expense (80.5% from 76.6%) -- total marketing costs constitute 58% of sales.

As for the outlook, Shopping.com announced that it expects revenues of $28 million to $29 million in the second quarter, with profits between $0.07 to $0.09 per share. The Street, however, was pegging $0.10 per share.

While Shopping.com appears to be making the necessary expenditures to enhance its market position, investors want short-term growth. And at least for this year, that will probably not be the case.

Fool contributor Tom Taulli does not own shares mentioned in this article.